The Fair Labor Standards Act:
Overtime ~ Plan for Big Changes Effective
December 1, 2016
Ann Abrams Price, Esq.
[email protected]|512-732-8904
Stephanie S. Rojo, Esq.
[email protected]|512-703-5047
Agenda
• Legal background
• What the new rule changes
• What remains the same
• Possible “reprieve?”
• What employers should do now
• Options for compliance
• Implementation issues
Fair Labor Standards Act
Assuming employer coverage and employee
status
• Minimum wage ($7.25/hour)
• Overtime pay (if more than 40 hours are worked in
a work week)
• Time-and-a-half the “regular rate"
• Exemptions from minimum wage and/or overtime
in statute and regulations
• Recordkeeping, especially hours worked by
nonexempt employees
• Child labor restrictions
Exemptions
“White Collar” Exemptions ~ both minimum
wage and overtime
• Executive
• Administrative
• Professional
• Certain computer employees
• Outside sales employees
Funky “good lobbyist” exemptions ~ e.g.,
evergreen wreath makers
Consequences of Violation
• Liability for unpaid overtime and/or minimum
wages within the limitations period
• Two years
• Three years if violation is “willful”
• Liability for “liquidated damages” equal to
above amount (essentially double damages)
• “Good faith” and “reasonable grounds” can
result in reduction or elimination of
“liquidated damages”
• Reasonable attorney’s fees, and costs
Common Misconception
“Salaried” = Exempt from Overtime
• Not always true
• Payment on a “salary basis” alone is not
sufficient to establish an exemption
• “Salary basis” means fixed weekly amount not
subject to reduction based on quality or
quantity of work
• Deductions may not be made unless the
reasons fall within a few permitted categories
What are the Tests?
Generally, three tests must be satisfied in order
to prove an exemption
1. Primary Duty
2. Manner of compensation – payment on a
“salary basis” is usually necessary, and
3. Amount of compensation
There is also a simplified “primary duty” test for
“highly compensated employees,” currently
those who earn at least $100,000 annually
The New Rule
• On May 23, 2016 the U.S. Department of Labor
published a final rule affecting the exemptions
• Executive
• Administrative
• Professional
• Proposed rule was published on July 6, 2015
• Focus on updating the minimum salary
requirement which had been in place since 2004
• Goal of establishing a mechanism for automatic
updates
• Suggested possible changes to “primary duty” tests
What the New Rule Changes
• Approximately 4.2 million employees who are
currently properly classified as exempt will be
entitled to overtime beginning on December 1,
2016
• The DOL estimates that an extra $1.2 billion
with go into workers’ pockets
$$$$$$$$$$
What the New Rule Changes
• More than doubles the “amount of
compensation” test
• Currently = $455/week ($23,660 annualized)
• Effective December 1, 2016 = $913/week ($47,476
annualized)
• Slightly less than the proposed rule indicated
• Basis ~ 40th percentile of weekly earnings of
full-time salaried workers in the lowest-wage
census region, currently the South
What the New Rule Changes
• Increases the requisite annual compensation
for “highly compensated employees” eligible
for application of simplified “primary duty”
test
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Currently = $100,000
Effective December 1, 2016 = $134,004
Weekly salary must be at least $913
Balance can be met with commission, bonus, etc.
“Catch-up” payment can be made in month 13
• Basis ~ 90th percentile of full-time salaried
workers nationally
What the New Rule Changes
• Automatic adjustments to both minimum
salary amount and annual compensation for
“highly compensated employees”
• Every three years beginning on January 1, 2020
• Minimum salary amount = 40th percentile, lowest
area
• Minimum amount for HCE = 90th percentile,
nationally
• DOL will publish updated amounts 150 days in
advance of effective date
What the New Rule Changes
• Allows employers to meet up to 10% of minimum
salary amount with
• Nondiscretionary bonuses
• Incentives
• Commissions
$821.70/week plus $91.30
$1,186.90 over quarter (13 wks)
Paid at least quarterly
Can make up shortfall in first pay period of the
next quarter
• If not, must reclassify as nonexempt for the quarter
and pay overtime due
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What Remains the Same
• Primary duties test
• Applicability to part-time workers (practically,
adds only recordkeeping requirements)
• No changes for non-profit employers
• No changes for positions not subject to the
minimum salary amount test
• Teachers
• Outside salespersons
• Practicing lawyers and doctors
• Other FLSA exemptions
Possible “Reprieve?”
• The Overtime Reform and Enhancement Act
(OREA)
• Incrementally phase in the new salary threshold
over the next three years; $35,948 on December 1
• Eliminate automatic updates to the salary threshold
every three years
• The Congressional Review Act
• Application unclear
• Depends practically on outcome of November
elections
What Employers Should Do Now
• How big is the potential problem?
• Identify employees currently classified as
exempt E, A, P who earn less than $913/week
• Estimate the amount of time worked greater than
40 hours per week
• Consider “off-site” and “after hours” work
• Determine if other employees have same or
similar job duties
• Wage compression
• Employee morale
What Employers Should Do Now
• Identify employees currently classified as exempt
under simplified primary duty test as “highly
compensated employees” who earn less than
$134,004 annually
• Audit to ensure any such employees meet the
more rigorous primary duty tests for executive,
administrative or professional employees
• Consider auditing all positions classified as
exempt to ensure compliance ~ improper
classification is frequently investigated/litigated
• Change in DOL enforcement position regarding
liquidated damages
Options for Compliance
Make changes to retain exempt status
• Increase pay to new minimum of $913/week
• Biweekly - $1,826
• Semimonthly - $1,978
• Monthly - $3,956
• If sufficient quarterly nondiscretionary
bonuses, commissions or incentives (at least
$1,186.90), increase weekly salary to $821.70
• Monitor carefully ~ require timekeeping?
• Make timely “catch up” payment if necessary
• If not, pay overtime ~ practical problems
Options for Compliance
Reclassify employees as nonexempt
• Set new pay ~ options and considerations
• Hourly
• Divide weekly pay by 40 hours?
• Account for overtime to keep wage expense level?
• Salary - 29 CFR § 778.113
• If for period longer than one week, reduce it to work week
equivalent
• How many hours is the weekly salary intended to
compensate?
Options for Compliance
• Set new pay ~ options and considerations,
cont’d
• Fixed salary for fluctuating workweek – Overnight
Transportation Co. v. Missel, 316 U.S. 572 (1942);
29 CFR § 778.114
• Hours may vary week to week
• Clear mutual agreement that salary is compensation for
all hours worked, whether few or many
• Each overtime week, divide salary by hours worked to get
“regular rate” for the week; pay half of “regular rate” for
overtime worked
• No deduction from salary in short weeks
• Must not go below minimum wage for all hours worked
Options for Compliance
• Compare:
• $20/hour, 50 hours = $1,100
• $20 * 40 hours = $800 and $30 * 10 hours = $300
• $800/week fixed for variable hours, 50 hours = $880
• $800/50 = $16 “regular rate"
• $16 divided in half = $8 * 10 hours = $80
Weekly Salary
Total Hours
Worked
x
Total Hours
worked - 40
2
Options for Compliance
• Caveats to fluctuating workweek method of
calculating overtime
• DOL in 2011 preamble took the position that hours
must actually fluctuate
• DOL also took the position that payment of
bonuses or other premiums is incompatible with
the method
• Courts have disagreed with DOL, but legal advice
should be obtained to ensure the method is
appropriate for a particular employer
Options for Compliance
• Restructure to minimize additional overtime
expense
• Remove or reassign duties so that newly
nonexempt employees can complete their work in
40 hours or fewer
• Hire more workers
• Consolidate exempt work to smaller group of
employees whose pay is raised to remain exempt
• Be mindful of management challenges and
employee concerns of fairness or unlawful
discrimination
Options for Compliance
• Any other options?
• 8 and 80 for hospitals and residential care facilities;
29 U.S.C. § 207(j); 29 CFR § 778.69
• Alternate “work period” up to 28 days with slightly
higher overtime thresholds for certain public
employees engaged in fire protection or law
enforcement if not preempted by Texas law; 29
U.S.C. § 207(k); 29 CFR § 553, Subpart C
Implementation Issues
• Account for any additional payments that need
to be included in the “regular rate”
• Statutory exclusions 29 U.S.C. § 207(e)
• Interpretive guidance 29 CFR Part 778, Subparts B
and C
• Ensure all hours worked are recorded and
properly compensated
• 29 CFR Part 785
• On-call, travel time, remote work, rest and meal
time policies should be reviewed
Implementation Issues
• Update job descriptions for accuracy and
compliance
• Identify benefits that hinge on FLSA
classification (time off, training, professional
development, etc.) and determine if changes
are needed
• Evaluate appropriateness of existing methods
of reporting time worked to new populations
Implementation Issues
• Identify training needs for managers
unaccustomed to managing nonexempt
workers and newly nonexempt employees
unaccustomed to reporting time worked
• Develop a plan for communicating changes
with sensitivity to perceived lowered status of
reclassified workers and perceived unfairly
increased workload for exempt employees